DBS upbeat on China innovative drug sector, flags Q4 buying chance
DBS Hong Kong is constructive on China's innovative drug sector, citing government targets for 20 per cent annual growth and policies easing pricing pressure. The bank flags fourth-quarter buying opportunities, projecting a sector re-rating as China's global share of first-in-class drugs rises.
DBS Hong Kong remains constructive on China's innovative drug sector, buoyed by rising central government support, and has flagged buying opportunities for the fourth quarter of this year.
China is targeting 20 per cent compound annual growth in the sector from 2026 to 2030, up from 7 per cent in the prior five years, and aims to lift the country's global share of first-in-class (FIC) drugs, medicines with entirely new mechanisms, by at least 25 per cent by 2030, according to the Ministry of Industry and Information Technology.
The bank projects China can meet these targets, backed by a series of policies to alleviate drugmakers' pricing and cost pressure. Innovative drug pricing has shifted from steep mandatory cuts to a flexible system, with new drugs getting a stable-pricing window and makers able to adjust prices according to electronic patient medical records. In addition, they can gain easier access to the National Reimbursement Drug List.
Meanwhile, the Bank of China (3988) will provide 1 trillion yuan (HK$1.17 trillion) for small-to-mid-sized innovative biotech companies over five years. The committed support is more than twice the total debt of Hong Kong and mainland listed pharmaceutical and biotech firms as of September 2026.
Mark Kong, executive director of Equity Research at DBS Hong Kong, said given the high research and development expenditures and volatile earnings characteristic of the sector, biotech firms have traditionally struggled to secure funding from financial institutions. Alongside rising interest rates, higher borrowing costs would be one reason the sector has been undervalued for a while versus the AI and technology space.
The increasing global share of FIC drugs could drive a sector re-rating, as it implies a larger pool of candidates for overseas out-licensing, where profit margins can exceed 90 per cent. China's out-licensing deal value has maintained over 100 per cent year-on-year growth from 2024 to the first half of 2026, contributing to a 110 per cent surge in the Hang Seng Biotech Index over the period, the bank reported.
Kong said the fourth quarter may see a short-term correction with potential buying opportunities, while new effective policies are disrupting marketing and forcing strategy overhauls, which may weigh on the third quarter's sales and sentiment, and further US Federal Reserve rate hikes will likely create persistent selling pressure.
DBS named BeOne (6160) a top pick with a HK$290 buy rating. Kong said it is the only firm among its top 20 listed peers with a US production facility and sales to capture the important US market and around 70 other countries, giving it greater flexibility to dodge tariffs and geopolitical risks.
As AI-driven drug discovery in China has become a growing trend, Nico Chen, healthcare sector analyst of Equity Research at DBS Hong Kong, said AI speeds up drug development. For example, it can cut molecular-structure work by half to 18 months, while the whole drug development cycle may be trimmed to eight years from the traditional 10, he added.